Last Saturday was the best day I’ve had in mining in a long time.
It was the Metals Investor Forum. Put on by Eric Coffin and myself (plus a great behind-the-scenes team) and co-hosted by fellow newsletter writers Brien Lundin and John Kaiser, the Forum brought together 12 Top Pick companies from our respective portfolios.
Everyone in attendance likely came already believing this sector offers significant upside, given that mining has been beaten down for years and reliably cycles back up.
But the energy in the room built as the day went on and, after a week thinking about it, I understand why.
It is one thing to believe it is generally time to invest in metals. It’s another to identify the specific stocks that will move first and farthest when the rally arrives.
To be in that position a company needs more than a good project. It needs momentum – the one thing that has been hardest to maintain during this long bear market.
Hard, but not impossible. The 12 companies that presented on Saturday all have momentum, achieved in different ways including adaptability, financial prudence, tenacity, and opportunism.
We heard from explorers who
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Sell In May and Go Away has become a hallmark of the mining sector. The summer doldrums are incredibly reliable – whether the overall picture is raging bull, sleeping bear, frenzied top, or exhausted bottom, mining markets lose ground in the summer.
Unless a new bull market is setting up.
Below I’ll show the graphs that prove this point, but for now take me at my word: the only positive summers in the last 25 years prefaced bull markets.
Which means a positive move over the next few months could represent the beginning of the next up cycle.
At the moment the TSX Venture Index is not moving up. Neither is it moving down, however; it is simply trading sideways within the same narrow range (665 – 710) that is has lived since January.
So no trend there to get excited or depressed about. Looking elsewhere, though, gives me reason to believe this summer could kick the doldrums habit and move up, ending this interminable bear.
Reason One: China
China has money. China also needs resources. It takes a lot of copper and steel to support millions of new urban dwellers.
However, China’s need is not so dire that
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Dear Resource Investor:
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Mining markets are at a bottom. Commodity prices are down and share prices have been hammered. Resource stocks with incredible upside potential are available at low, low prices – but you have to pick right.
SNEAK PEEK:
Some of the Companies Presenting at MIF and Why They Deserved an Invite
From Gwen Preston, The Resource Maven:
Kaminak Gold’s Coffee project in the Yukon offers everything an asset needs to become a mine. It has 2.5 million oz. of oxide gold resource. The gold sits in coherent, near-surface bodies that would be easy to open-pit mine. Metallurgy is easy; basic heap leaching should recover 94% of the gold. It is in an area of gentle topography, where roads are inexpensive to build and mine engineering is not complicated. The nearby Yukon River means fuel and equipment can be barged to site. Kaminak
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There are two reasons to like how things are currently looking.
For one, gold stocks have carved out an undeniable 6-month uptrend. The uptrend established despite gold itself only moving sideways, despite US markets continuing to inch up, and despite the feeling that gold stock disinterest remains widespread. And the upswing has pushed up through some long-term trends.
There are reasons that has happened – but first, the second reason I like how things look.
Gold is quietly proving its case as a steady hand in this strange market. From bond yields to exchange rates and economic indicators to stock market performance, the global economy is doing weird things. As the weirdness continues, people are remembering gold’s unique ability to offer both security if things weaken and exposure if things strengthen.
There is much to say about all of that. Let’s dive in.
Gold Stocks Are Gaining
Since bottoming at a six-year low in November gold stocks have been ascending.
The early-year hump somewhat conceals the trend, but it is there – whatever gold does. In April, for example, gold surged then declined to end the month flat but gold miners as portrayed by the GDX
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Mining markets are at a bottom. That much is clear.
There is also general agreement that commodity prices are low and share prices have been hammered.
For anyone who believes what goes down must at some point go back up – and, given that the products of mining are literally the backbone of society, the eventual upcycle is inevitable – it means there are resource stocks with incredible upside potential available right now at low, low prices.
But you have to pick right. The bear market has quieted some of the noise but there are still hundreds of exploration companies telling interesting tales. And a sneaky logic prevails: every company that’s survived this long in the bear market must offer value and potential, right?
Perhaps – but the survivors still cover a wide range of quality. Some survived by raising very cheap money and diluting their share count. Some had to offer cheap, long-life warrants that could cap price gains. Some have no momentum, having not really done any work for several seasons. Some high-graded their mine reserves and now face rising production costs.
There are many, many ways companies either helped or hurt their long-term
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I keep encountering articles about looming supply crunches for gold and zinc, about how little risk there is left in mining equities with valuations so low, and about situations that exist only because mining has been so beaten down, like companies trading below cash in the bank or getting bought at a 100% premium to their four-year low or in-the-black producers getting no credit for consistent dividends.
The bounce along the bottom continues, but don’t get hypnotized. There is news out there that deserves your attention.
Constantine Metals
Take Constantine Metals’ resource update, out today. After a successful drilling program last season Constantine was able to double the resource at its Palmer project in southeast Alaska.
Palmer is now home to 8.1 million inferred tonnes of volcanogenic massive sulphide mineralization carrying average grades of 1.41% copper, 5.25% zinc, 0.32 gram gold, and 31.7 grams silver. The resource sits in five discreet lenses, four of which are open for expansion in most directions. And the most exciting intercepts at Palmer came late last season, from a geophysical target below the old resource that begs for further drilling.
The deposit at Palmer is made of steeply dipping lenses inside
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It can be hard to keep caring. Day after day, it feels like the same story: gold moves up or down a touch, pundits keep fretting over interest rates and earnings and the strength of the dollar, a few explorers or developers release news to muted response, and perhaps a junior gets taken out for a small fraction of what it was worth three years ago.
It feels boring, repetitive, like everyone is in a holding pattern until the markets improve.
Until you pay closer attention.
Up close the mining sector is busy as, adding value to current assets and positioning new projects for startup. Sure, there are lots of inactive companies with little to no money. But there are many companies determined to maintain momentum no matter how long this bottom lasts.
I will admit: I was starting to feel a bit nonplussed by it all, a bit bored by the lack of activity and a bit annoyed by the endless wait for the next bull. But a stream of interesting news over the last few days broke me out of that funk and reminded me of two vital considerations:
1. Good companies keep
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“When you start digging, so many juniors are way messier and less valuable than they first appear.”
So said a friend – let’s call him John – who I encountered on transit the other morning. John is a mining analyst. He worked for one of the bigger investment banks for a good many years, before moving to an advisory firm.
His group helps junior companies figure out their options. Is raising money possible? If so, how and on what terms? Are there mergers or acquisitions that make sense? How should assets be valued in such scenarios? Who might be interested?
To answer these questions, John and his team delve into a company’s details. More often than not, they encounter one of two problems.
The first: promoting an overly rosy financial picture. There are many ways to spit-polish finances, some more sinister than others. On the dark end of the spectrum are companies that distort blatantly by overblowing property valuations to keep the corporate balance sheet in the black.
Less sinister are the companies that produce reasonable financial statements, but then talk a much prettier picture knowing many investors and brokers do not look closely.
“We have
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Yamana Gold just announced a deal to buy Canadian gold explorer Mega Precious Metals in a deal valued at C$17.5 million.
MGP investors will get 0.2092 YRI shares and C$0.001 for each Mega share. That implies a share price of C$0.10, a 120% premium to Mega’s closing price yesterday.
That sounds great. And it is, for anyone who bought MGP shares in the last seven months. Those with a longer timeframe might see things differently.
Or they might not, if they are realists, because this is a good deal regardless.
Mega has some good projects. Monument Bay is a large land package in Manitoba with 2.1 million measured and indicated oz. gold plus notable tungsten, in a coherent, open-pittable deposit with a high-grade starter zone. The North Madsen project in Ontario has another 888,750 M&I ounces of gold and the Blue Caribou property in Nunavut hosts an inferred copper-moly-silver-gold resource.
They are all interesting projects with real potential. However, advancing them from here would require access to the most elusive of assets today: cash.
I’m sure Glen Kuntz and the rest of the Mega team wishes they were announcing a higher-priced deal, but they deserve congrats
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Apologies for the absence. I spent last week running and biking the trails of Zion National Park in Utah on a needed vacation.
It’s an incredible place: steep, deep canyons cut through sandstone mountains.
With such impressive topography, I expected the river responsible to be a big one. I was wrong. The Virgin River is small enough to wade across without getting your shorts wet in most places.
Rather than brute force, the Virgin carved its deep canyons with persistence.
Metal explorers today are all too familiar with the value of persistence.
It has taken focus, creativity, and a tonne of persistence for today’s surviving explorers to remain alive. Companies with money in the bank and exploration programs on the go deserve much credit for their persistence in the face of falling metal prices and a deep dearth of investment capital.
It is one thing to persevere knowing that good results will be rewarded. It is yet another to keep on keeping on when good news gets lost as often as it gets noticed, which is what junior explorers have faced for the last few years.
We saw a clear example of that
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